Beyond Aid Pledges: Time for Long-term Reforms

Pakistan is currently in economic turmoil, with widespread speculation of a de facto sovereign default. Even though there is many a slip between the cup and the lip, the latest news from the Geneva conference about generous pledges worth US $9.7 billion for flood recovery provides little hope.

Genuine relief is contingent upon the actual realisation of these pledges and the amount of cash transferred in the form of foreign currency over the next six to twelve months. Similarly, the UAE has agreed to roll over US $2 billion of existing loans as well as an additional loan of a billion dollars, which is also a positive portent.

Commitments, rollover financing, and loans can help Pakistan improve its financial position and avert the immediate risk of default in the short term, but long-term reforms must be introduced to structurally transform the economy in order to achieve sustainable and resilient economic growth. Otherwise, we will face a similar threat of default within six to eighteen months.

The process by which a country transitions from an inefficient, low-value-added, subsistence-level agriculture-based economy to a more efficient, high-performing industrialised and services-driven economy is known as structural transformation. This transformation is often accompanied by changes in the composition of output and employment, as well as shifts in the technological capabilities of firms and workers. In order to promote structural transformation, a number of economic reforms can be implemented.

One important reform is the creation of a stable macroeconomic environment. A stable macroeconomic environment is key to investor confidence and business growth, and drives structural transformation. It requires a balanced mix of monetary, fiscal, and exchange rate policies along with reforms in other key policies related to labour, tariffs, agriculture, industry, and anti-monopoly measures. In addition to consistency of policies, political stability is also a crucial constituent of a stable macroeconomic environment.

Another important reform requirement is the development of human capital. Pakistan is experiencing the phenomenon of the “youth bulge” which can be transformed into a “youth dividend” through human capital development. Investing in human capital through education and training programmes can help increase the capabilities of workers and firms, which in turn can promote technological upgrading and structural transformation. This also includes the transformation of the education system from the present general literacy framework to the STEM literacy framework that focuses on science, technology, engineering, and mathematics (STEM). ICT, research, innovation, and artificial intelligence are the cornerstones of a modern hi-tech, industrialised, and service-driven economy.

Along with reforming human capital development, innovation, and R&D, another intricately linked reform is the promotion of competition in domestic markets through the transformation and modernisation of the agricultural, industrial, and services sectors. This can help increase productivity and efficiency in firms and can also promote the technological upgrading.

For instance, the per-worker agricultural productivity and per-hectare yields in Pakistan have stagnated over time, and the sector is over-employed. In the agricultural sector, people are either underemployed or unemployed in disguise. We need to modernise and mechanise our farming practices, along with the adoption of hybrid seed varieties, water-conserving practices, and climate-smart precision agricultural practices. Other than increased productivity, there is a need to diversify the crop mix from low-value traditional crops to high-value crops.

Similarly, the manufacturing industry of Pakistan is characterised by stagnation, low productivity, and a lack of competitiveness, and its share in GDP has shown a declining trend in the last three decades. Scarce and costly energy, poor infrastructure, and a lack of access to finance are the key challenges making Pakistani products uncompetitive in the global market, which face severe competition from emerging economies.

Globally, the fourth industrial revolution (Industry 4.0) will transform how the manufacturing industry will design, manufacture, and sell products. Pakistan’s industrial policy should be re-evaluated, as competitors such as Bangladesh and Vietnam have already incorporated Industry 4.0 into their long-term industrial policies.

The development of infrastructure is another key area for reform. Adequate infrastructure is crucial for economic growth and structural transformation, as it helps increase productivity and lowers costs for businesses. Particularly in the wake of the emerging global recession, investment in infrastructure is important for job creation and employment generation. However, infrastructure development must be geographically balanced and not exacerbate spatial disparities. Along with spatially equitable infrastructure investment, there is also a need to focus on the social safety net and target spending on social protection for deprived segments, which is equally important in an economy in recession.

Promoting exports and foreign investment is also critical for structural transformation. Foreign capital inflows can help bridge the twin deficits — the saving-investment gap and the import-export gap — as well as help developing countries leverage their comparative advantages to become more competitive in global markets. Additionally, foreign investment can also provide access to technology, capital, and international markets.

A stable macroeconomic environment requires economic reforms for structural transformation include creating developing human capital, developing infrastructure, promoting competition in domestic markets, and promoting exports and foreign investment. These policies can be challenging to implement and require long-standing commitment and political consensus but are essential for long-term growth and stability.

Copyright Business Recorder, 2023

Source: Article first appeared in Business Recorder on January 24th, 2023 @ https://www.brecorder.com/news/40221984

The writer (Dr. Ghulam Mohey-ud-din) is Director Economic Affairs at the Centre for Aerospace & Security Studies (CASS), Lahore, Pakistan. He can be reached [email protected]